1. Field of the Invention
This invention relates to electronic systems for authorizing transactions, and in particular to authorization systems utilizing a host computer and a network of remote electronic terminals.
2. Description of the Prior Art
Historically, credit and debit authorization systems have been devised in an attempt to permit only those transactions that result in proper payment to the proper parties Typically, credit authorization systems involve the entity extending the credit (creditor), the entity providing the goods or services on credit to the customer (merchant), and the one to whom credit has been extended typically by issuance of a card representing access to credit (card holder). The creditor and merchant may be different or may be the same entity, but there is risk to both, namely, the risk of improper or lack of payment.
Conventional authorization systems seek to balance risk within recognized limits against the cost of the authorization service to determine under what conditions the transaction will be allowed. The cost of credit authorization should not outweigh the costs of potential risk.
In the early days of credit cards, mere possession of the card was considered sufficient to authorize the transaction. This is still prevalent in the oil industry. However, as the losses from fraud and bad credit accounts continued to mount, many companies, including creditors and merchants, published a periodic listing of credit card account numbers that would not be honored. This system, unfortunately, was fraught with errors, and it was difficult to keep the published listing up to date and distributed in timely fashion to the merchants and their employees. In addition, even if the proper report was with the merchant's employees or clerks, there was frequent neglect on the part of the clerk at the point of sale or transaction to utilize the published reports properly, if at all.
The next step in the evolution of credit authorization systems was the floor limit/voice authorization combination whereby smaller dollar transactions, i.e., below the floor limit would be allowed. However, those above the floor limit required a telephone call to a representative of the creditor or merchant who had access to current, or recent information on the status of a particular credit card account. The representative would then provide a code number via which they would guarantee the transaction would be collectable. These typically utilize telephonic voice equipment for contacting a representative having access to current or recent information in the host computer. These systems are still in wide use today, but are quite slow, cumbersome, and also error prone.
With the advent of low-cost electronic terminals, there have recently been major steps in the direction of virtually 100 percent electronic authorization. These systems are remote in the sense that they are at the point of sale or requested transaction, and the systems virtually guarantee payment for all authorized transactions. They also provide for electronic transfer of funds usually within 24 hours. Unfortunately, there are two significant problems associated with these types of systems: (1) customer waiting time in which the clerk, customer, and those in line behind the customer must wait an additional 30 seconds to 3 minutes or more to obtain the authorization; and (2) operating cost of making connections to the host computer, i.e., telephone calls. In most cases, each transaction requires a separate telephone call, and for low-value transactions the cost of the call can become the major expense of the authorization service.
There are some credit authorization systems which attempt to use the warning bulletin method by broadcasting via radio waves accounts which are identified as transactions which require host authorization even though the transaction request amount is below the floor limit for the terminal. However, such systems require geographic clusters of terminals and costly equipment to receive radio waves, and requires additional terminal memory, since the data is not terminal specific, i.e., based on a larger universe of required data with more data storage requirements. It's costly to manufacture and operate.
Another approach has been to use "smart" credit or debit cards wherein account information is modified and stored on the card itself. The major drawbacks with this approach are (i) the drastically increased cost to manufacture "smart" cards, and (ii) drastically increased complexity and cost of the electronic terminal user to accept and process "smart" card information.
Thus, conventional prior art authorization systems do not provide a cost-effective means of authorizing transactions quickly within acceptable limits of risk.